Total state pension liabilties, when valued the same way bonds are, total to $5.17 trillion. Then we have municipal, corporate pensions, and the biggest of all being social security. There is way too much at stake for the monetary authorities to allow asset deflation to occur. Thus, devaluation is not a politically viable option.

Many stock market bears and delfationists argue that the amount of monetization that has taken place is not enough to stave off asset price deflation. What they fail to consider is additional and future monetizations. There is a strong possibility that the Fed will allow the markets to walk on their own two feet for a time, to see if markets can generate growth on their own. However, I dont see this lasting very long as the deflationary forces will continue to take hold. Thereafter, the screams and cries for monetary expansion will overwhelm the policy makers and printing will continue enmass.

Marc Faber the other day said that he projects US deficits to reach over $2 trillion per annum by 2015. He attributes the growing deficit number to the new health care bill. He also argues that equties will continue to benefit from the money printing but that they will underperform hard assets like gold. I agree with MF's assessment.

Total state pension liabilties, when valued the same way bonds are, total to $5.17 trillion. Then we have municipal, corporate pensions, and the biggest of all being social security. There is way too much at stake for the monetary authorities to allow asset deflation to occur. Thus, devaluation is not a politically viable option.

BMT, WTF are you talking about? Since when have policymakers demonstrated one iota of [genuine, bona fide] concern for the middle class and their pensions?

I think there is a legitimate argument that the very well politically connected banksters will continue to be the benefactors of corrupt policy, and for that reason, not the one you stated, I think that policy moves to prevent a big crash may, for now, be instituted.

Contrary to what you imply, pensions have not participated [yet] in this rally to any great degree. Yes, of course they are always exposed to the market, but most are still underweight equities and playing defensively. If you were to posit a hypothesis that the market will be supported precisely because the pensions are not yet fully invested, and because the banksters want to sell their longs to the pensions before bringing on a crash to benefit the banks at the expense of the pensions, then I would agree with you. But IMHO to suggest that the policymakers principal concern is making sure pensioners are taken care of is ludicrous. That would equate to government by and for the people, setting aside the desires of special interests. Dude, what planet are you living on?

BMT wrote:

Many stock market bears and delfationists argue that the amount of monetization that has taken place is not enough to stave off asset price deflation. What they fail to consider is additional and future monetizations. There is a strong possibility that the Fed will allow the markets to walk on their own two feet for a time, to see if markets can generate growth on their own. However, I dont see this lasting very long as the deflationary forces will continue to take hold. Thereafter, the screams and cries for monetary expansion will overwhelm the policy makers and printing will continue enmass.

I agree with this part.

BMT wrote:

Marc Faber the other day said that he projects US deficits to reach over $2 trillion per annum by 2015. He attributes the growing deficit number to the new health care bill. He also argues that equties will continue to benefit from the money printing but that they will underperform hard assets like gold. I agree with MF's assessment.

There is just too much at stake for the Benron not to print.

Marc Faber is also calling for a 25 - 30% correction from the April highs. He is saying to expect a big sell off as reality starts to hit the market, followed by more QE just as you predict by the time the S&P gets down to 900, then another move higher as fed-induced asset inflation continues.

BMT, if I am reading you correctly, you are saying you don't think that 30% sell-off to 900 is possible. I think you're mistaken. Before the EU errupted, I was convinced the gov't was going to HAVE to allow a sell off in equities, just to keep a bid under the treasury market which was faltering. With the EU falling apart, there's plenty of outside capital flowing into the USD and treasuries, so they don't have to allow the market to correct any more, but I still think it will. As the flow of cash out of the EU slows and US Treasuries start to fall back to where they were a few weeks ago, I think that's when you'll see another round of QE. But until then, I'm with Faber - I think we're going to see mid-900s on the S&P before new QE restarts the liquidity-driven fantasy rally in equities.

This time is not different. The equity market has always been, and is still a function of profit, not macro-economics. The "Hal 9000s" will be forced to generate profit from shorting the market, because there will be no more shorts to squeeze. I can't accept the notion that the market cannot drop for whatever reason, because the notions are always just market play.

Even if God came down from the heavens and said "This market shall always rise", I would just laugh and say, "Oh Yeah God? Human history says your wrong!" and then when the whole world was singing "Kum-by-ya my Lord", I would be shorting the perception.

This time is not different. The equity market has always been, and is still a function of profit, not macro-economics. The "Hal 9000s" will be forced to generate profit from shorting the market, because there will be no more shorts to squeeze. I can't accept the notion that the market cannot drop for whatever reason, because the notions are always just market play.

Even if God came down from the heavens and said "This market shall always rise", I would just laugh and say, "Oh Yeah God? Human history says your wrong!" and then when the whole world was singing "Kum-by-ya my Lord", I would be shorting the perception.

Many stock market bears and delfationists argue that the amount of monetization that has taken place is not enough to stave off asset price deflation. What they fail to consider is additional and future monetizations. There is a strong possibility that the Fed will allow the markets to walk on their own two feet for a time, to see if markets can generate growth on their own. However, I dont see this lasting very long as the deflationary forces will continue to take hold. Thereafter, the screams and cries for monetary expansion will overwhelm the policy makers and printing will continue enmass.

BMT, asset price inflation is not a function of monetary expansion alone. It requires monetary expansion AND the ability/willingness of borrowers to take on debt. Likewise, asset price deflation is not driven by monetary contraction. Asset prices fall when borrowers who took on debt in the previous credit boom begin to default, driving bank assets (loans) down. It is the defaults themselves that ARE the deflation, as every default punches a rather large hole in bank asset line items. So it is the other way around: asset price deflation drives monetary contraction.

I would not say that the deflationist argument holds that the amount of monetization is not enough to stave off asset price deflation. That is a misunderstanding of deflationist theory. It is not that the monetization is not enough, it is that it is both not enough and most importantly, it does not lead to asset price inflation because asset price inflation requires that individuals take on more debt.

Apart from that, it is curcial to understand that the credit boom preceding our market peak, like all market peaks of the last 40 years, was driven by the fractional-reserve-banking credit creating mechanism, which automatically creates at least $10 worth of credit for each $1 worth of "money". This leverage works just as easilly in reverse, so that each $1 in defaults results in $10 of lost assets on the banks' asset sheets. So, when we speak of say, $1 trillion in property defaults, what we are really talking about is $10 trillion in credit that dissapeared off bank asset sheets.

Monetary printing can create more "money" but it cannot create more credit unless borrowers and lenders are willing to enter into transaction with each other.

Finally, economic history since 1720 shows that every single credit-boom has been followed by a deflationary bust. I don't think it's different this time.

I do think that the end result, after deflation has knocked the socks off everyone, that the answer will be to print print print. At that point, a very large part of the debt will have been destroyed, and that's when inflation/hyperinflation will kick in with gusto.

Marc Faber is amazing. I highly recommend his book, "Tomorrow's Gold - Asia's Age of Discovery". It's not about gold and it's hardly about Asia. Instead, it is really a primer on the history of economic cycles since the beginning of markets to present day. If I had ten thumbs, I'd give it ten thumbs up.

Many stock market bears and delfationists argue that the amount of monetization that has taken place is not enough to stave off asset price deflation. What they fail to consider is additional and future monetizations. There is a strong possibility that the Fed will allow the markets to walk on their own two feet for a time, to see if markets can generate growth on their own. However, I dont see this lasting very long as the deflationary forces will continue to take hold. Thereafter, the screams and cries for monetary expansion will overwhelm the policy makers and printing will continue enmass.

BMT, asset price inflation is not a function of monetary expansion alone. It requires monetary expansion AND the ability/willingness of borrowers to take on debt. Likewise, asset price deflation is not driven by monetary contraction. Asset prices fall when borrowers who took on debt in the previous credit boom begin to default, driving bank assets (loans) down. It is the defaults themselves that ARE the deflation, as every default punches a rather large hole in bank asset line items. So it is the other way around: asset price deflation drives monetary contraction.

I would not say that the deflationist argument holds that the amount of monetization is not enough to stave off asset price deflation. That is a misunderstanding of deflationist theory. It is not that the monetization is not enough, it is that it is both not enough and most importantly, it does not lead to asset price inflation because asset price inflation requires that individuals take on more debt.

Apart from that, it is curcial to understand that the credit boom preceding our market peak, like all market peaks of the last 40 years, was driven by the fractional-reserve-banking credit creating mechanism, which automatically creates at least $10 worth of credit for each $1 worth of "money". This leverage works just as easilly in reverse, so that each $1 in defaults results in $10 of lost assets on the banks' asset sheets. So, when we speak of say, $1 trillion in property defaults, what we are really talking about is $10 trillion in credit that dissapeared off bank asset sheets.

Monetary printing can create more "money" but it cannot create more credit unless borrowers and lenders are willing to enter into transaction with each other.

Finally, economic history since 1720 shows that every single credit-boom has been followed by a deflationary bust. I don't think it's different this time.

I do think that the end result, after deflation has knocked the socks off everyone, that the answer will be to print print print. At that point, a very large part of the debt will have been destroyed, and that's when inflation/hyperinflation will kick in with gusto.

Marc Faber is amazing. I highly recommend his book, "Tomorrow's Gold - Asia's Age of Discovery". It's not about gold and it's hardly about Asia. Instead, it is really a primer on the history of economic cycles since the beginning of markets to present day. If I had ten thumbs, I'd give it ten thumbs up.

I do think that the end result, after deflation has knocked the socks off everyone, that the answer will be to print print print. At that point, a very large part of the debt will have been destroyed, and that's when inflation/hyperinflation will kick in with gusto.

FB. It's funny that you stated this because just yesterday in a PM with JAG I told him that I buy into the "deflation first, hyperinflation later" argument.

My analysis tells me that if you don't prepare for deflation first, then you don't have to worry about the later hyperinflation.

Hyperinflation as I see it, is like bombing the rubble. It is coming, and one should have a plan for it, but to go long hyperinflation might mean getting killed during the preceeding deflationary unraveling.

This leverage works just as easilly in reverse, so that each $1 in defaults results in $10 of lost assets on the banks' asset sheets. So, when we speak of say, $1 trillion in property defaults, what we are really talking about is $10 trillion in credit that dissapeared off bank asset sheets.

I hadn't thought of this, hmmmm, we are screwed. Thanks for the insight FB.

This leverage works just as easilly in reverse, so that each $1 in defaults results in $10 of lost assets on the banks' asset sheets. So, when we speak of say, $1 trillion in property defaults, what we are really talking about is $10 trillion in credit that dissapeared off bank asset sheets.

I hadn't thought of this, hmmmm, we are screwed. Thanks for the insight FB.

Yeah, I hadn't thought that aspect through. It pretty much sealed any doubts that I had.

The only camp that I belong to is the one that presently has the most solid and compelling argument. The past few months I have seen some very strong pro-deflation arguments, particularly here and over at Mish's site.

uh....hum....one little glitch is the market is rising.....again LOL. New breakers & trade rules are being discussed at the SEC......hum is this just new terminology of rigging?? My bet will be Peter Schiff will be right that Gold & the market with be trading together at some point be it tarp or a la tarp.

re deflation and inflation - one consideration in guessing which will happen when is not whether or if government will try to print massive sums of money - rather it will be if they can get away with it.

Notice since the economic crash started 2 years ago - printing money leads to inflation (higher equities and commodities anyway). However, with each bullet (lets say every 500 Bln or more in bailouts/printing), the markets reaction will become more negative. That is to say interest rates will start spiking more and more the more monetization that happens. Further, equities will move up less and less per dollar printed. At some point, governments will see inverse reactions to printing money than they have this past week - and at that time the game will be over.

M3 is contracting far more than Europe plans on printing - and far faster. Already in the last week we have seen international yields spike up (exception being Treasuries for flight to safety reasons). Further, equitiy markets are still lower than where they were a couple weeks ago. The money printing effect seems to be losing its power.

Remember when the US congress refused to pass a bailout last March, and the market tanked and tanked. They have often paniced into decisions based on what the market does in reaction to their actions. They finally passed the stimulous/bailout and the market calmed and that was the low...or near it. As the market and masses vote against monetization more and more (which is the case so far in the past week - relative to previous massive printing) - policy makers will move from the printing press to something else.

I too am on the deflation first, followed by pain like Japan has seen - - flatline for a long time. I dont think with this amount of leverage and credit in the world right now that the scenario can play out where we print ourselves into hyperinflation.

Credit is everything. The Automatic Earth has some brilliant perspectives on this theory - well thought through.

-- The U.S. Pension Benefit Guaranty Corp., which insures private-sector pension plans and manages failed ones, lost at least $3 billion in stock investments through August, the head of congressional subcommittee said Wednesday.

It's likely the losses were exacerbated by the global markets' meltdown in September, said Rep. George Miller, D-Calif., who heads the committee that oversees the PBGC.

Stock investment losses at PBGC illustrate a larger problem. Pension plans at S&P 500 companies are taking a huge hit this year, raising the likelihood that corporations will have to make large unplanned cash infusions next year even as global economic growth slows. This could undercut profits.

Howard Silverblatt, senior index analyst at Standard & Poor's, calculates corporate pension plans will be underfunded by at least $219 billion by yearend -- the largest deficit since 1991.

This is a sharp reversal from last year, when company pensions were over-funded by $63 billion, he said.

Public pensions are big players in the political sphere. Lets put things into perspective for a second. All this talk about the "big banks" and hal 9000, yes they are crooks and charlatans but at the end of the day their power is limited. Do realize that at the end of the day, if mark to market wasnt suspended and if they didnt print so much money the market would be at SPX 500. What would happen to all the 401k's and public pensions then??? Who do you think owns all the assets in the country?? The reality is that the bond holders, stock holders of all these massive companies are institutional and pensions funds. Who is the most political powerful constituency? The boomer class, as they own the majority of the wealth. With SSI already in the red and underfunded with the gov knowing this, you think theyre going to allow the alternative retirement plan to go to hell in a handbasket? No way! Remember in the 29 crash people were invested in the market but now millions of retirements are tied to the markets. Millions of corporate joes have their 401 and watched them get decimated. This wont be allowed to happen again.

Its very simple, its called the printing press. And yes, I do realize that money is created out of debt. But what if the federal reserve note is created without a asset on the other side? What if Benron starts outright printing with no bond issuance on the other side? People see 2.3 trillion dollar balance sheet for the fed and think thats huge, just watch as it balloons to 5 trillion.

This rally is more important than ever and the PTB know this. They will devalue the currency or face tens of millions of angry and BROKE upper middle class citizens. They say the average investor is out of the market that may be true but institutional funds are in it. And dont forget that even though the market tanked in march of 09 for a few weeks sub 700 that was a short period of time. Many funds held their positions and have been adding since.

The alternative situation is that the PTB defend the dollar at the expense of all the people mentioned above. If this is true then wealthier americans get stiffed at the expense of the poor. A weaker dollar would hurt the bottom 40% of americans as they have no assets in financial markets. HA HA HA. Like the policy makers have EVER cared about the bottom 40%. The reality is that the bottom 40% will become more impoverished than ever as prices increase even though there wages will remain stagnant. Asset price inflation will benefit the top 20% of americans, a percentage of the population that is EXPONENTIALLY more important than the bottom 40%.

This is what the bailout has been amount, to protect the wealth of the upper 25% of the country. Yes, the benefits went to top management as they kept their jobs. But what did the average 401k holder say when he saw his retirement fund recoup its losses? Nothing, he said, good benron good, now print more!

America is already a 2 tiered society, watch as the gap continues to grow..

Thanks BearMarket....I respect this opinion for sure. However, as I have thought of the cause effect of this process I just cant see it happening. Lets walk through it: The next time the US prints a ton of money via bailout or debt issuance - they kick the can down the road X weeks. Equities rally on inflation fears and the retirement money is diluted but holds its perceived value to the masses. But, for each time they print more money, the money has less impact. Inflation past a certain point is not good for equities. Eventually, equities start selling off and interest rates spike up each time they print money. When they see this harm and "unexpected" turn of events, they will stop printing money as not only does it mean more debt, but also immediate harm as well.

So, I think they keep trying to print, but at some point the system will stop giving short term rewards to this action, and when that happens the masses will demand they stop.

So, eventually, printing money will lead the market to similar reactions as an overnight currency devaluation. Crushing all asset classes and spiking interest rates to the moon. I see your points and understand and also think they will attempt to print more money...but when it becomes detrimental the moment they do it they will stop - or face losing their power and re-election.

Is it necessary that every dollar created has to have a equivalent debt instrument created alongside with it? In a game where the rules are ever changing this is a rule that we truly need to consider. Maybe the fed comes out with a new facility, some freakin "term reserve liquidity facility" where currency is pumped out without a corresponding asset. They changed asset valuation rules, why not change this rule.

When nominal values have been successfully pushed higher as a result of currency devaluation, interest rates will have a much less detrimental effect on the markets. There are just too many political connected entities that are holding on to assets at valuations that will crush them, unless the NOMINAL ASSET VALUE corresponds with the debt value. They will be successful in this endeavor, but in the end the bottom half of this country will be utterly wrecked.

Is it necessary that every dollar created has to have a equivalent debt instrument created alongside with it? In a game where the rules are ever changing this is a rule that we truly need to consider. Maybe the fed comes out with a new facility, some freakin "term reserve liquidity facility" where currency is pumped out without a corresponding asset. They changed asset valuation rules, why not change this rule.

When nominal values have been successfully pushed higher as a result of currency devaluation, interest rates will have a much less detrimental effect on the markets. There are just too many political connected entities that are holding on to assets at valuations that will crush them, unless the NOMINAL ASSET VALUE corresponds with the debt value. They will be successful in this endeavor, but in the end the bottom half of this country will be utterly wrecked.

It isn't necessary, but the amount of money that would have to be printed is simply ridiculous and I don't think even politicans or central bankers would attempt to take it that far. The nominal values of assets won't matter if the purchasing power of the dollar plummets, so those politically connected people will still get crushed. I think this time is different is many ways, one being that the traditional socioeconomic class distinctions do not matter anymore. Everyone will start to realize that they have to fend for themselves as the scope of the predicament reveals itself, and traditional political structures will not be maintained. The world is changing in very fundamental ways, and only a very small % of the population are going to make it out in one piece and an even smaller % will materially benefit from the changes.